Pension reform dealt blow by Illinois Supreme Court

In a case with ominous implications for the state's pension reform law, the Illinois Supreme Court ruled today that the state constitution prevents any diminishment of health care benefits for retired state employees.

According to the 6-1 decision, the pension protection clause -- which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” -- applies to other retirement benefits, not just pensions. That overrode the state's argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits. (Read the opinion below.)

The decision comes while the state is defending against challenges to an overhaul in December 2013 of pensions for state workers and schoolteachers outside Chicago. It also has implications for recent cutbacks in health care retiree benefits by the city of Chicago, which filed a friend-of-the-court brief supporting the state's position.

“This is a major victory for members of state retirement systems,” said John Fitzgerald, a partner at Chicago law firm Tabet DiVito & Rothstein LLC who represents retired state teachers and school administrators. “I expect it will have a very significant effect on pending litigation” over the state's pension reform law. “It means that the Illinois Supreme Court is giving the pension protection clause the broad and liberal interpretation that the drafters intended.”

The court rejected the state's argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state's health care subsidies constituted an impairment or diminishment of those benefits.

Illinois Attorney General Lisa Madigan said the court's opinion "has no direct impact on the pension reform litigation arguments," according to the Associated Press. Gov. Pat Quinn's offices is confident last year's pension law will be upheld, AP reported.

But Senate President John Cullerton, who has warned that pension reforms would be found unconstitutional, issued a statement saying that the decision indicates he was correct.

“The court cannot rewrite the pension clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve,” he said. “If the court's decision is predictive, the challenge of reforming our pension systems will remain.”

'RIGHTS OF THE PENSIONER'

In an opinion written Justice Charles Freeman, a Chicago Democrat, the court indicated that it would not take a deferential approach. The court said any changes to a pension statute "must be liberally construed in favor of the rights of the pensioner," quoting one of its own opinions, written in 2013, that involved a dispute over early retirement between an electrical department supervisor and the downstate city of Peru.

“If they had intended to protect only core pension annuity benefits and to exclude the various other benefits state employees were and are entitled to receive as a result of membership in the state's pensions systems, the drafters could have so specified. But they did not,” according to the 20-page opinion. “We may not rewrite the pension protection clause to include restrictions and limitations that the drafters did not express and the citizens of Illinois did not approve."

In one key paragraph, the court rejected the idea that the state's budget crisis could justify a change in retiree benefits.

In its examination of the floor debate on the pension protection clause during the drafting of the state constitution in 1970, the opinion says: The intent of the pension protection clause was “to guarantee that retirement rights enjoyed by public employees would be afforded contractual status and insulated from diminishment or impairment by the General Assembly. In light of the constitutional debates, we have concluded that the provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

“Throughout the majority opinion, the justices seem to make abundantly clear that they read the (constitutional) language to read exactly what it said,” former state budget director Steve Schnorf said. “If they can read the pension clause to protect health benefits . . . they certainly would use it to protect pension benefits.”

In the challenges to the overhaul of pensions for state workers and schoolteachers outside Chicago, the state has argued that changes in the cost of living allowance are not protected by the pension clause because they are not a core retirement benefit.

“This definitely shuts down the argument that the COLA isn't part of the benefit,” said Amanda Kass, budget director and pension specialist at the Center for Tax and Budget Accountability, a nonprofit advocacy group in Chicago.

BURKE'S DISSENT

In a 10-page dissenting opinion, Justice Anne Burke tried to narrow the impact of the majority opinion, possibly with an eye toward the bigger pension cases to come.

The plaintiffs, representing retired state employees and teachers, were challenging a 2012 law that repealed a previous statute requiring the state to pay the full cost of health care benefits.

While ruling that health coverage is covered by the pension protection clause, the majority did not address whether the 2012 law actually violated the constitution, according to Ms. Burke, a Chicago Democrat and wife of Alderman Edward Burke.

The trial court did not decide whether the 2012 law “'would be an unconstitutional diminishment or impairment of those rights, or whether they were subject to a justifiable exercise of a power to adjust private contractual rights, including in contracts with the government itself,'” Ms. Burke says, quoting the attorney general's brief.

Yet Mr. Freeman made clear the 2012 changes were not minimal. He distinguished a decision by New York's highest court, which held that health care benefits are not covered by that state's pension protection clause, by saying it involved a “mere increase in contribution levels.”

The Supreme Court's decision sends the case back to the Sangamon County circuit court, which had dismissed the case at the state's request.

“The merits of plaintiffs' pension protection clause claims remains an open question,” Ms. Burke wrote. “That is the issue that will be decided by the circuit court on remand.”